PPACA tax raises state Medicaid bills

Mendelson says the revenue helps pay for the new restrictions on medical underwriting.

By Alex Nussbaum|February 12, 2014 at 07:37 AM

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(AP photo/Denis Poroy)

(Bloomberg) — Health insurers told to pay $150 billion in taxes over a decade to help fund Patient Protection and Affordable Care Act (PPACA) programs are now shifting at least part of that cost back to taxpayers.

Congress passed the insurer tax four years ago to help cover the uninsured under PPACA. Now, the industry is pushing to include some of the cost in contracts with Medicaid programs for the poor that are jointly funded by state and federal governments.

The strategy may add $36 billion to $39 billion to the cost of Medicaid over a decade, depending on how quickly the health program expands, according to an industry-funded study released today by the actuarial firm Milliman Inc.

The tax shift is “one of the awkward little complexities of the law that are only now coming to light,” said Dan Mendelson, chief executive officer at Avalere Health LLC. “It’s unusual.”

The insurer tax was among a variety of fees included in the act to make health-care companies pay their “fair share,” as U.S. Senator Charles Schumer of New York put it during the 2009 debate over the legislation. The idea was that insurers who would benefit from millions of taxpayer-subsidized customers under the law should contribute toward its costs.

With the tax kicking in this year, companies that manage Medicaid plans are arguing that the added cost should be shifted, and states seem willing to comply. The result is a “very circular” scenario in which the U.S. government raises money from insurers then hands at least part of it back, said Shawn Guertin, the chief financial officer at Aetna Inc. (NYSE:AET).

The tax “doesn’t make any sense to be levied on the Medicaid HMOs,” Thomas Carroll, an analyst at Baltimore-based Stifel Nicolaus & Co., said in a telephone interview. “It’s all going to be paid by the taxpayers.”

States will pay $13.3 billion to $13.9 billion more with the federal government picking up the rest of the cost, Seattle- based Milliman projected in its study. As a result, annual Medicaid payments will rise about 1.6 percent a year starting in 2015, the actuary found.

The report was commissioned by Medicaid Health Plans of America, a Washington-based industry group that has pushed for the tax to be repealed.

The 2010 law known as Obamacare imposes an estimated $150 billion in taxes on for-profit insurers over the next decade, Milliman estimates. Employers with self-funded plans and nonprofits that specialize in Medicaid or Medicare policies, such as local hospitals, are exempt.

The added costs need to be weighed against the benefits of PPACA, including new restrictions on medical underwriting that ensure sick Americans can’t be denied insurance, said Mendelson, a former budget official in President Bill Clinton’s White House, in a phone interview. The law will expand coverage to 25 million people starting in 2016, according to congressional projections.

While the act may raise Medicaid costs, “it also means now it’s possible for a person with diabetes in this country to get insurance,” Mendelson said. “It’s not fair to look at any one of these effects in isolation.”

$350 per year per family

The tax is based on a company’s U.S. market share. It’s also expected to raise premiums by as much as 2.5 percent for employers and individuals who buy their own insurance, according to a 2011 estimate by Congress’ Joint Committee on Taxation. That would add $350 to $400 a year for the average family premium if the entire tax is passed onto consumers.

Thirty-seven states outsource at least some of their Medicaid coverage to private insurers. The industry has leverage thanks to federal rules that require states to pay “actuarially sound” fees to ensure companies can provide adequate benefits to the poor. Most states interpret that to include the cost of federal taxes.

That has left states little choice, said Mari Cantwell, a chief deputy director at California’s Department of Health Care Services, which runs the state’s Medicaid program.

California expects to spend $87 million on the health insurer fee in the next fiscal year, according to the department. While that’s a small portion of the $34 billion it expects to pay to Medicaid insurers, it’s still “confounding” Cantwell said in a telephone interview.

“It’s a tax on plans, but in the Medicaid world, it’s really a tax on both the state government and the federal government,” she said.

In Florida, where Republican Governor Rick Scott has been an outspoken critic of Obamacare, the tax is projected to cost the state as much as $1.2 billion over a decade, Milliman said.

“Unfortunately, if you have to pay a tax like this, it has to come out of something else,” Michelle Dahnke, a spokeswoman for the Florida Agency for Health Care Administration, said in a phone interview. “We may have to let something else go.”

Who pays?

Insurers should “pay their fair share,” said Ryan Carey, a spokesman for the Senate Finance Committee, whose Democratic majority helped write PPACA’s tax provisions. He didn’t say whether states should be reimbursing the fee.

“From the very beginning, every group that stood to gain from 25 million newly insured Americans was going to pitch in and help make the law work,” Carey said in an e-mail. “That’s the way the law was designed, and it shouldn’t change now.”

WellPoint Inc. (NYSE:WLP), the insurer with the biggest Medicaid enrollment, defended the request on a conference call with analysts Jan. 29.

“The states are really understanding the need for a viable program required this fee to be passed on,” said Joseph Swedish, chief executive officer at Indianapolis-based WellPoint. “They understand the need for a sustainable Medicaid program, and this is part of sustainability”

For some insurers, shifting the fee is “critical” for 2014 profit, said Carroll, the Stifel Nicolaus analyst. At about 2 percent of premiums, the tax is equal to the entire increase Medicaid insurers get in most years, he said. Because the levy isn’t deductible from corporate income taxes, its impact will be magnified, he said by telephone.

“It could absolutely be a big chunk of profits” for some insurers, Carroll said.

So far, health plans say they’re succeeding in getting the fee covered. UnitedHealth Group Inc. (NYSE:UNH), the biggest U.S. medical insurer, told analysts on a Jan. 16 call that it has written agreements from a third of the 24 states where it sells Medicaid plans and verbal commitments from others. Aetna also has found support, said Guertin, the CFO.

“The good news is that nominally most states recognize that it needs to be an element of the rate,” he said in an interview. “Medicaid has always been a low-margin business.”

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